How To Conserve Cash in the Face of Major Disruptions?

The unraveling coronavirus pandemic is disrupting supply chains and altering consumer behavior. To insulate themselves from the ravages of market and economic volatility, companies are rushing to hoard cash in order to remain sufficiently capitalized. A substantial number of companies are increasing their credit capacity (Royal Caribbean upped theirs by $550 million on March 10, 2020 for example). Before reaching out to the external markets, The Hackett Group recommends that companies look at freeing up cash from existing operations, as the latest working capital study indicates the top 1,000 US companies now have over $1.3 trillion tied up in excess working capital. The way to freeing up this cash is through a sustained and focused working capital improvement initiative that can include some or all the following elements:

1. Accounts receivable: Focus on reducing overdue receivables, putting in place (or improving) a robust credit risk exposure and write-offs process, enhancing customer payment terms, and addressing high levels of unbilled receivables by speedier and more frequent billing if appropriate: In particular:
   • Tightening up accounts receivable processes by putting in place (or strengthening) proactive collection processes, ensuring minimal invoicing errors, and optimizing billing frequency.
   • Reviewing and benchmarking customer payment terms by region to ensure they are in line with what the market bears.
   • Making sure that credit risk processes are robust and up to date, and incorporating last minute information in what is shaping up to be a very fluid situation.
2. Inventory: Focus on optimizing inventory levels within current constraints by applying a statistical approach combined with pragmatic organizational enablement, and balancing cash, cost and service for a next level in inventory performance by shifting constraints. In particular:
   • Conducting a supply chain risk assessment to identify weak links – what does that mean to strategic inventories in the short run and sources in the mid-to long run?
   • Reviewing stocking parameters – companies may want to buffer on strategic stocks and spot buy when strategically appropriate.
   • Assessing demand spikes and supply limitations to ensure that cash is not invested in the wrong inventory, and incorporating cost and margin criteria if SKU/product prioritization decisions need to be made.
   • Reviewing transportation models including cash/cost trade-off.
   • Reviewing current planning parameters and inventory levels to achieve quick wins, and releasing cash for strategic investments, which could include opportunities for price renegotiation if suppliers are looking to offload inventory.
3. Payables: Focus on conducting a full payment-term mapping by supplier category and by region, on reviewing goods receipt, invoice timing, and payment runs as well as eliminating early payments and cleaning up parts payments and other system housekeeping; additionally, executives should introduce supply chain finance offerings, including payment-term discounting to inject liquidity into the supply chain. In particular:
   • Understanding the supply base risks and payment performance to see where payment terms can be further optimized.
   • Introducing liquidity mechanisms into the supply chain to ensure stability of the supply chain, and investigating dual sourcing options to ensure supply continuity.
   • Ensuring procure to pay end-to-end processes are optimized, especially around invoicing timing and payment terms operations.

Finally, now is a good time to educate or re-educate the managerial and operational staff on the importance of cash and how each stakeholder can have an impact on cash conservation for the company. Running a cash awareness program and implementing cash targets can ensure that cross-functional teams are well informed and ready for current and future uncertainties. As the old adage goes “Cash is king.” And this is even more true in the face of an unpredictable economic environment, which we’re certainly now in the midst of.

More information on The Hackett Group’s working capital management solutions can be found here.